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02/09/2011

Regional input cost, manufacturing indicators rise in January

The Econometrics Center at Kennesaw State University released its monthly Purchasing Managers' Index (PMI) report on manufacturers across the Sixth District this week. In January, the Southeast PMI continued its upward trend as Sixth District manufacturers hinted at a slightly brighter current economic picture and expressed an improving outlook.

"A majority of business contacts indicated that current cost pressures remained high, citing increasing material prices and rising labor and benefits outlays. However, most firms remained reluctant to pass input cost increases through to consumers given intense competitive pressures."

Atlanta Fed President Dennis Lockhart discussed the topic in his recent speech in Anniston, Ala.:

"And because movements of commodity and other 'headline' prices seem to be creating the impression in the popular consciousness of a growing inflation problem, I would like to give particular attention today to inflation."

Speaking specifically about his view on inflation, President Lockhart noted:

"What we're searching for is the underlying inflation trend that the FOMC [Federal Open Market Committee] statement talks about and which we want to control. And since an exact fix on the state of inflation is elusive in the short run, the best policy approach, in my opinion, is to pursue a low, but positive rate of inflation over the longer term. As a policymaker, I think of the desirable level of inflation as high enough to provide a cushion of safety against the risk of tipping into deflation but low enough to be largely irrelevant—not a consideration—in long-term decision making. For me, this number is around 2 percent.

"Notwithstanding the energy-driven jump in prices in December, underlying inflation is currently below the level that I would define as price stability. My current projection shows underlying inflation gradually rising over the next few years, putting us back into a range consistent with the 2 percent target by 2013. Key to the realization of this inflation forecast is that inflation expectations of the public remain well anchored. And for this to happen, the public has to have a good appreciation of what the central bank is trying to achieve and have adequate faith that we will achieve it."

On manufacturingThe overall Southeast PMI as measured by our friends at KSU increased 2.5 points in January, putting the index at 58.9. The national PMI gained just a little less than the regional PMI in January (rising 2.3 points) to reach 60.8.

Both the regional and national indicators have taken a relatively sharp upward turn over the last couple of months, but the Southeast PMI remains on the heels of the national PMI, in their aggregate forms and in most underlying variables.

Though it continues to lag behind the national measure, the new orders index for manufacturers in the Southeast has seen significant upticks over the last few months. As new orders are a leading indicator, this upward movement is encouraging for future production levels. Also noted in the latest report, 63 percent of survey participants across the Southeast said they had plans to increase production levels in the next three to six months, up from 54 percent reporting plans to increase near-term production in December 2010.

Several other Federal Reserve Banks produce monthly manufacturing surveys that yielded similar results as the KSU PMI survey for January. Higher aggregate indices and particularly higher levels of new orders were noticed in the New York Fed's Empire State manufacturing survey (where data is indexed to 0 instead of 50), and the Philadelphia Fed's manufacturing survey, where the new orders index jumped 13 points. Future expectations for new orders were also higher in most regional surveys. Half of respondents in the Kansas City Fed's manufacturing survey indicated they expect new orders to continue increasing over the next six months.

By Mike Chriszt, an assistant vice president in the Atlanta Fed's research department,

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